For Immediate Release - September 16, 2008

Massachusetts Attorney General Martha Coakley to Testify Before House Financial Services Committee Regarding Auction Rate Securities

WASHINGTON, D.C. – On Thursday, September 18, 2008, Massachusetts Attorney General Martha Coakley will testify before the U.S. House Financial Services Committee regarding her Office’s role in investigating the practices of brokers selling auction rate securities to municipalities and other state entities.  Attorney General Coakley has been invited to testify before the committee by its chairman, Representative Barney Frank from the Massachusetts 4th District. 

Testimony of Massachusetts Attorney General Martha Coakley before the U.S. House Financial Services Committee.

Thursday, September 18, 2008
10:00 a.m.

Rayburn House Office Building
Room 2128
Washington, D.C.

“The collapse of the auction rate securities market and ensuing fallout for investors – which was caused in part by widespread misleading sales practices of investment banks – has created a vicious Catch-22 for both the non-profit and government issuers of these bonds, such as student loan issuers and medical care entities, and left investors across the spectrum without access to their funds,” said Attorney General Coakley.  “We are pleased that the Committee is looking closely at the auction rate securities market and attempting to help both investors and issuers.  I’m honored that Chairman Frank has invited me to offer testimony.”

Attorney General Coakley will testify as part of a panel with Secretary of State William Galvin.  In her testimony, Attorney General Coakley will highlight the impact that the fallout of the auction rate securities market has had on Massachusetts, as well as efforts undertaken by her office to recover money for municipalities and state agencies that were misled into investing in auction rate securities by investment banks.  Attorney General Coakley will also suggest possible Federal government solutions to provide relief to investors and entities that issued auction rate securities.

Attorney General Coakley’s Office has recovered $75 million for Massachusetts governmental entities from investment banks regarding auction rate securities this year:

  • In February, 2008, the Attorney General’s Office obtained a repayment by Merrill Lynch of $13.9 million for the city of Springfield, which allegedly had been misled into purchasing auction rate securities.
  • In May, 2008, the Attorney General’s Office obtained $37 million in recoveries for various towns and cities that had been allegedly misled into investing into risky auction rate securities by agents of investment banking giant UBS.  In July, UBS also paid an additional $1 million to the Commonwealth related to the sales of these instruments and reimbursed an additional $3.4 million to the remaining UBS municipal clients for their investments.
  • Last month, Morgan Stanley repaid $1.5 million to two municipalities resolving allegations involving the investment bank’s sale of inappropriate auction rate security investments.
  • Last Friday, the Attorney General’s Office announced that Citibank agreed to purchase $20 million in auction rate securities that it sold to the Massachusetts Water Pollution Abatement Trust.

An auction rate security is a debt instrument, such as a bond or preferred stock, for which the interest rate or dividend is periodically reset through an auction mechanism.  In some instances, towns and cities were persuaded to invest their cash accounts into these auction rate security accounts.  Although these securities have long-term maturities of many years, they historically have been offered for sale at weekly or monthly auctions.  However, in early 2008, the market for auction rate securities dried up and the auctions through which they were sold experienced widespread failures.  When an auction fails, liquidity disappears from the market as it becomes difficult to dispose of such securities at all, let alone at par value.  Many such securities have been written down to reflect their reduced market value.  Auction rate security investments have been frozen since early this year due to lack of market liquidity, and the value of municipal investments have been written down by investment banks. 

The hearing will be held in the Rayburn House Office Building, Room 2128, at 10:00 a.m.  Attorney General Coakley, Secretary Galvin and representatives from the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority will be the first panel to testify.  After all panelists have testified, Attorney General Coakley will be available for questions from the Committee.

Download and view Attorney General Coakley's testimony: